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Upstream vs. Downstream Rebate Programs

Let’s assume that you manage a facility that is littered with T-12 fixtures that you want to replace with T-8 fixtures (and if you’re not swapping out, you should be!). Typically, you would purchase the equipment, have it installed, apply for a rebate, and have a check mailed to you. This is a classic example of a downstream program. This type of program helps the consumer offset the first cost of the equipment and reduces the payback period to a manageable timeframe. Also, the additional money gives the consumer the opportunity to purchase a higher end, energy efficient product that they could otherwise not afford, in turn increasing their energy savings further.

There are incentive programs however, that don’t provide incentives in the “downstream” methodology, programs like Southern California Edison’s HVAC rebate program or Florida Power & Light’s lighting rebate program. In these programs, the consumer purchases the equipment and the installing contractor, distributor, or the equipment manufacturer receives the rebate. The check is mailed directly to the contractor who may or may not reflect the incentive as a credit on the cost of the new equipment. This is the architecture of an upstream incentive program. The upstream programs are designed to encourage distributors to stock only the most energy efficient equipment. These upstream programs are more effective with HVAC systems retrofits than with lighting systems retrofits since many HVAC replacements are done on an emergency basis, a situation which essentially forces the consumer to purchase whatever product is most readily available.

Downstream programs encourage John Q. Consumer to make better buying choices. The customer purchases a more efficient product; the utility gives them a little pat on the back (monetarily, of course); everyone wins. Upstream programs encourage manufacturers to develop more efficient products and encourage distributors to keep high efficiency products in stock, to encourage the consumer to make smarter purchasing decisions.

It may be a little easier to understand how the two different incentive program methodologies work using a different context. Since the 1970’s governments at the state, local, and Federal level have been adopting legislature to encourage the recycling of plastics, metals, paper, etc. in order to free up space in landfills and manage our nation’s natural resources. In order to encourage recycling we’ve created local recyclable pick-up mandates. We’ve provided incentives to switch to paperless billing and notification options. These are both downstream solutions that essentially provide a “patch” to fix the underlying problem of consumer waste management. But let’s say we want to attack the problems at the source, and stop the inefficiencies within the system before they are even created. Maybe we develop new materials that are made to decompose over a given time period. Maybe we find a way to create paper from something other than trees. These are both upstream solutions, eliminating the need for a patch in the first place.

In summary, while both upstream and downstream incentive programs help attain our ongoing energy consumption reduction goals, they each have their own unique pro’s and con’s. Upstream programs have the ability to influence consumer choices on a much broader scale, and in turn more quickly change the market standards of energy efficient technologies. Unfortunately, the incentives associated with upstream programs don’t always go into the consumers’ pockets to help offset the energy efficient equipment costs. Most upstream programs do not require the distributor to expose the full amount of the rebate or incentive to the consumer/end user; therefore, the distributor has the ability to “pocket” a portion of the incentive as profit margin against the cost of the project. Downstream programs present the largest opportunity for consumers to receive incentives, but at a National level, only provide a temporary fix to our energy consumption goals.